{"id":205,"date":"2021-01-26T22:24:07","date_gmt":"2021-01-26T22:24:07","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&p=205"},"modified":"2021-05-17T22:24:08","modified_gmt":"2021-05-17T22:24:08","slug":"introduction-to-pricing-decisions","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/introduction-to-pricing-decisions\/","title":{"raw":"Introduction to Pricing Decisions","rendered":"Introduction to Pricing Decisions"},"content":{"raw":"

What you will learn to do: Establish a price for products and services<\/h2>\r\n\"HelmetFor most businesses, the goal in pricing a product is to select the price at which total future revenues exceed total future costs by the greatest amount, thus maximizing income.\r\n\r\nWhen applying differential analysis to pricing decisions, each possible price for a given product represents an alternative course of action. The sales revenues for each alternative and the costs that differ between alternatives are the relevant amounts in these decisions. Total fixed costs often remain the same between pricing alternatives, but if producing and selling more units affects underlying fixed costs, that variable has to be taken into account as well.\r\n\r\nLet\u2019s review the contribution margin format for calculating operating income as a way to assess various prices:\r\n\r\nLet\u2019s say REVLAND\u2019s current contribution margin break-even analysis looks like this:\r\n
\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
REVLAND\r\nCVP Analysis - break even\r\nFor the month ending July 31, 20XX<\/caption>\r\n
<\/th>\r\nUnits<\/th>\r\n$\/unit<\/th>\r\nTotal<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
Sales<\/td>\r\n702<\/td>\r\n$400.00<\/td>\r\n$\u00a0 280,800.00<\/td>\r\n<\/tr>\r\n
Variable costs<\/td>\r\n702<\/td>\r\n$286.00<\/td>\r\n200,772.00<\/td>\r\n<\/tr>\r\n
Contribution Margin<\/td>\r\n<\/td>\r\n$114.00<\/td>\r\nSingle Line<\/span>80,028.00<\/td>\r\n<\/tr>\r\n
Fixed costs<\/td>\r\n<\/td>\r\n<\/td>\r\n80,000.00<\/td>\r\n<\/tr>\r\n
Operating income<\/td>\r\n<\/td>\r\n<\/td>\r\nSingle Line<\/span>$ \u00a0 \u00a0\u00a0\u00a0\u00a028.00Double line<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
CM ratio<\/td>\r\n<\/td>\r\n28.50%<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nREVLAND produces motorcycle helmets that consist of an outer shell made of layers of fiberglass that are hand-cut and then pressed into a mold. There is an interior shell made of polystyrene that absorbs impact in case of a crash. The outer shell is finished and painted by machine, but the decals are placed by hand. Then the helmet is covered by transparent protective paint and the inner shell and padding are added by hand. One of the things that makes these helmets unique is the embedded communications and crash detection electronics. It takes ten hours to make one helmet.\r\n\r\nThey currently plan to sell the helmets at $400 direct to the consumer via their online store, however, since they haven\u2019t actually started selling helmets yet, they have hired a marketing firm to estimate demand at various price points.\r\n\r\nWe\u2019ll follow the REVLAND company throughout the next readings as an example to learn more about the process of establishing a product price.\r\n\r\nWhen you are done with this section, you will be able to:\r\n